The COVID-19 economic crisis shows we need a better way to fund SMEs.

The COVID-19 economic crisis shows we need a better way to fund  SMEs.

Many small business owners are already in dire financial straits and sadly it will get worse when the life support provided by JobKeeper and bank forbearance is turned off in September.

The Covid-19 economic crisis has highlighted deficiencies in the way SMEs are able to access debt finance primarily through the big four banks. This oligopoly is not the panacea for the cash flow woes of SMEs and politicians and small business owners alike cannot expect banks to bail SMEs out of a crisis.

And whilst non-bank lenders provide an alternative, they are barely making a dint in the market share of the big four banks.

There has to be a better way.

The first of this two part series addresses the question of why the Government’s strategy to quickly get debt into the hands of SMEs is not working as well as all stakeholders had hoped.

The second part offers a left field suggestion that would improve access to SME credit.


Here are three explanations:

1. Banks are not approving as many loans as the Government was perhaps expecting. They banks are being extremely cautious about approving new applications for credit. Understandably so given that they are being encouraged to “look through the cycle” when they don’t even know when the cycle will end.

The Government has made a huge amount of money available to banks so they can assist SMEs “hibernate until we get to the other side”.There is the $90b Term Funding Facility plus the SME Loan Guarantee Scheme where the Government guarantees half of the loans made by the banks up to $40b.

Six weeks after these two schemes were announced, the ABA has confirmed the banks have made new small business loans of nearly $8.5b which is less than 7 per cent of the total $130b of funds available.

These loans have been made to 23,000 small businesses which is slightly above one per cent of the total number of SMEs in Australia. Interestingly, this reflects an average loan size of $370,000 which seems quite high for small businesses.

These statistics raise questions about the number of applications made, approval rates and the average time taken to make a decision. The ABA and the Government should make all this information available to the taxpayers who ultimately carry the risk.

2. Many SMEs just don’t want to take on more debt. As Karl my local barista says, “I already have as much debt as I want to carry, I do not want to take on any more”. Uncertainty surrounding access and timing of payments under JobKeeper has made many reluctant to apply for bank debt even to bridge receipt of Jobkeeper payments.

The ABA says the banks have made 170,000 business loan deferrals (this relates to all businesses, not just small businesses). Whilst repayment holidays provide some much needed breathing space, the fact that the interest is being capitalised and still has to be repaid starting in September is not lost on small business owners.

3. The enormity of the task has stretched the banks capabilities. In my March newsletter on The $90 Term Funding Facility is a litmus test for the big banks I noted that “The Government is putting a huge amount a faith in the banks’ ability and willingness to step up to the plate”. Limitations with their technology and bureaucratic structures and processes mean that they were always going to struggle to get cash into the hands of SMEs quickly and efficiently.

“We have been talking to tens of thousands of businesses, and they are hurting very badly,” said NAB’s CEO Ross McEwan.

All this has meant that decision making times have been and continue to be impacted. According to the March edition of the Broker Pulse survey, turnaround times for business loans at the big four was around 13.5 days in the March quarter – up from 10.5 days in the previous quarter. Anecdotal reports suggest this could be much higher.

Who would want to be running a bank these days? Whatever decisions they make, bank bosses face intense scrutiny from a diverse range of stakeholders and this is unlikely to abate.

Government. When politicians make poor decisions, it’s easy to deflect blame onto the banks. Showing Trump like tendencies, last week the PM lambasted banks for not lending businesses enough money to tide them through the month or so until the JobKeeper payments kick in.

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The PM’s comment that “They have to stand by these businesses in their time of greatest need… and that is now” is straight out of Chapter 1 of the Bank Bashing Bible. The better solution in the first place would have been for the Government to make these payments earlier so the banks would not have to be asked to provide Jobkeeper bridging loans. But due to their own limitations they tried to pass the buck onto the banks who have their own limitations.

Still, the banks can sometimes be their own worst enemy. The comment from ABA CEO Anna Bligh that “Australia’s banks have supported the country through difficult times in the past and continue to do so” plays into the hands of those who question whether the banks have really learned the lessons from the Royal Commission.

The “partnership” between the Government and the banks that was briefly evident in the early stages is likely to continue to be tested as self-interest prevails.

Shareholders. Bank loan loses are mounting, profits are tanking and this is reflected in share prices and dividends. Shareholders, both institutional and retail, will not sit idly by while their returns continue to suffer. They will be prepared to wear a share of the pain but only for so long.

Bank bosses who have gone to great lengths to make the point they are putting customers first will be perplexed as to how to deal with this imponderable. Banks ironically are amongst the highest geared businesses in the economy and when ROEs fall from around 12 per cent to below 5 per cent, protection of shareholders and depositors funds becomes unequivocally the number one priority and so it should.

Customers. Small business customers who have been rejected for a loan or who have waited a long time for a decision may be inclined to criticise the bank for not helping them in their time of need but as ANZ’s Shayne Elliot rightly made clear “not all businesses will survive this crisis”. The banks can only lend if they are reasonably satisfied the borrower will be able to service and ultimately repay the loan. Old banking philosophies like “good money after bad” and “your first loss is your best loss” may sound harsh but the bank’s balance sheet will always be a higher priority than any customer’s position.

Regulators. The regulators have bank bosses walking on eggshells. APRA is telling banks to watch out for capital management when considering dividend policies and ASIC is reminding banks about responsible lending. Any slip up is likely to be heavily publicised and punished.

Analysts. Some banking analysts feel that the $5b of new loan loss provisions recently raised does not appropriately recognise the level of losses the industry is going to suffer. In addition, they have their own views on dividends and capital raisings. Whatever decisions the banks make, they will be closely scrutinised by analysts and commentators but that is their job.

For the non-bank sector, and the fintechs in particular, the mantra is survival. They have mostly yet to turn a profit and have not experienced a downturn. They mostly lend unsecured and take bigger risks than banks. They don’t employ vast numbers of people which means that the focus has largely been on dealing with existing impacted customers. With small balance sheets and reserves they cannot afford to absorb big loan losses or to offer six month repayment holidays like the banks.

Their inability to compete on price has been compounded by the banks being gifted a $90b Government line of credit at a rock bottom rate of 0.25 per cent pa. Their distinctive advantage is the ability to move more quickly than banks.

With this in mind, the Government has thrown a bone to several non-bank lenders by approving them under the SME Loan Guarantee Scheme. The Australian Small Business & Family Enterprise Ombudsman, Kate Carnell, noted this should help stricken businesses get working capital loans even faster than through the big four lenders. “The thing that’s good about these guys is they are used to lending unsecured and they are used to lending quickly,” Ms Carnell said.

Unfortunately, this is not happening. A number of lenders including the biggest fintech Prospa as well as the fully licensed Judo Bank have been promoting scheme loans for over three weeks but are still not delivering on them.

In time, other programs like the $2b Australian Business Securitisation Fund and the $15b Structured Finance Support Fund will undoubtedly assist selected non-bank SME lenders grow their books but this is going to take many months and the numbers are still relatively insignificant.

The bottom line is that SMEs need and deserve better than what the big four bank oligopoly offers. And whilst the steps taken to date to promote competition are showing positive signs, it will take years before niche players like challenger banks, neo banks, fintechs and other non-bank SME lenders will have a major impact on the big four’s dominance of SME lending – assuming they actually want to take on the big four.

The Covid-19 economic crisis has highlighted the deficiencies in the way SMEs access debt finance especially in times of a crisis. There has to be a better way. Tomorrow’s newsletter offers a left field solution.

Comments and feedback are welcomed.

Neil Slonim


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